**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
|------------|--------------------------------------------------------------------------------------------------|
|       | **For  the quarterly period ended March 31, 2002**                                               |
|       | **OR**                                                                                           |
|       |                                                                                             |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE  SECURITIES EXCHANGE ACT OF 1934** |

 

 

**Commission file number 001-16047**

 

**AdvancedPower Technology, Inc.**(Exact name of registrant as specified in its charter)

 

 

 

| **Delaware**                    |   | **93-0875072**         |
|---------------------------------|--------|------------------------|
| (State or other Jurisdiction of |   | (I.R.S. Employer       |
| Incorporation or Organization)  |   | Identification Number) |

 

**405SW Columbia Street, Bend, Oregon  97702**(Address of principal executive offices and Zip Code)

 

**(541)382-8028**(Registrant’s telephone number)

 

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to thefiling requirements for the past 90 days. Yes ý   No o

 

 

The number of shares of the Registrant’s Common Stock outstanding as ofMay 10, 2002 was 10,355,614 shares.

 

 

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

** **
| **Part I**  |     | **Financial  Information**                                                                  |
|-------------|----------|---------------------------------------------------------------------------------------------|
|        |     |                                                                                        |   |
|        |     |                                                                                        |   |
|        | Item 1.  | Financial Statements:                                                                       |
|        |     |                                                                                        |   |
|        |     |                                                                                        | Consolidated Balance  Sheets as of March 31, 2002 and December 31, 2001 |
|        |     |                                                                                        |   |
|        |     |                                                                                        | Consolidated  Statements of Operations for the three months ended March 31, 2002 and 2001 |
|        |     |                                                                                        |   |
|        |     |                                                                                        | Consolidated  Statements of Cash Flows for the three months ended March 31, 2002 and 2001 |
|        |     |                                                                                        |   |
|        |     |                                                                                        | Notes  to Consolidated Financial Statements |
|        |     |                                                                                        |   |
|        | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|        |     |                                                                                        |   |
|        | Item  3. | Quantitative  and Qualitative Disclosure About Market Risk                                  |
|        |     |                                                                                        |   |
|        |     |                                                                                        |   |
| **Part II** |     | **Other Information**                                                                       |   |
|        |     |                                                                                        |   |
|        | Item 6.  | Exhibits and  Reports on Form 8-K                                                           |
|        |     |                                                                                        |   |
|        |     | Signature                                                                                   |   |
|             |          |                                                                                             |  |  |  |

 

2

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

** (In thousands, except share amounts)**

 

 
|                                                                                                                                                                                        |   | **March 31,**   |   | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------------|--------|
|                                                                                                                                                                                        |   | **2002**        |   | **2001**         |   |
|                                                                                                                                                                                        |   | **(Unaudited)** |   |             |   |
| **Assets**                                                                                                                                                                                  |   |            |   |             |   |
| Current assets:                                                                                                                                                                             |   |            |   |             |   |
| Cash and cash equivalents                                                                                                                                                                   |   | $               | 6,345  |             | $      | 16,102 |   |
| Short-term investments                                                                                                                                                                      |   | 22,989          |   | 17,093           |   |
| Accounts receivable, net of allowance of $93 (2002) and  $59 (2001)                                                                                                                         |   | 5,389           |   | 3,493            |   |
| Inventories, net                                                                                                                                                                            |   | 10,388          |   | 9,307            |   |
| Prepaid expenses and other current assets                                                                                                                                                   |   | 2,112           |   | 3,422            |   |
| Total current assets                                                                                                                                                                        |   | 47,223          |   | 49,417           |   |
|                                                                                                                                                                                        |   |            |   |             |   |
| Property and equipment, net of accumulated amortization  and depreciation of $9,207 (2002) and $8,804 (2001)                                                                                |   | 7,260           |   | 5,546            |   |
| Long-term investments                                                                                                                                                                       |   | 1,404           |   | 2,473            |   |
| Other assets                                                                                                                                                                                |   | 592             |   | 639              |   |
| Technology rights, net of accumulated amortization of  $124 (2002)                                                                                                                          |   | 7,325           |   | —           |   |
| Goodwill                                                                                                                                                                                    |   | 15,061          |   | —           |   |
| Total assets                                                                                                                                                                                |   | $               | 78,865 |             | $      | 58,075 |   |
|                                                                                                                                                                                        |   |            |   |             |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                               |   |            |   |             |   |
| Current liabilities:                                                                                                                                                                        |   |            |   |             |   |
| Accounts payable                                                                                                                                                                            |   | $               | 2,913  |             | $      | 2,805 |   |
| Accrued expenses                                                                                                                                                                            |   | 2,002           |   | 1,031            |   |
| Current portion of capital lease obligations                                                                                                                                                |   | 80              |   | 73               |   |
| Total current liabilities                                                                                                                                                                   |   | 4,995           |   | 3,909            |   |
| Deferred tax liability                                                                                                                                                                      |   | 2,296           |   | —           |   |
| Capital lease obligations, less current portion                                                                                                                                             |   | 51              |   | 58               |   |
| Deferred gain on sale leaseback                                                                                                                                                             |   | 155             |   | 160              |   |
| Total liabilities                                                                                                                                                                           |   | 7,497           |   | 4,127            |   |
|                                                                                                                                                                                        |   |            |   |             |   |
| Stockholders’ equity:                                                                                                                                                                  |   |            |   |             |   |
| Preferred stock, par value $.001, 1,000,000 shares  authorized; no shares issued and outstanding                                                                                            |   | —          |   | —           |   |
| Common stock, par value $.01, 19,000,000 shares  authorized; 10,416,779 issued and 10,307,922 shares outstanding in 2002;  8,836,637 shares issued and 8,727,780 shares outstanding in 2001 |   | 104             |   | 88               |   |
| Additional paid-in capital                                                                                                                                                                  |   | 88,045          |   | 67,640           |   |
| Treasury stock, at cost, 108,857 shares                                                                                                                                                     |   | (1,700          | )      | (1,700           | )      |
| Deferred stock compensation                                                                                                                                                                 |   | (558            | )      | (166             | )      |
| Accumulated other comprehensive income                                                                                                                                                      |   | 73              |   | 117              |   |
| Accumulated deficit                                                                                                                                                                         |   | (14,596         | )      | (12,031          | )      |
| Total stockholders’ equity                                                                                                                                                             |   | 71,368          |   | 53,948           |   |
|                                                                                                                                                                                        |   | $               | 78,865 |             | $      | 58,075 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** (In thousands, except per share amounts)**

**(Unaudited)**

 

** **
|                                                                                       |   | **Three Months Ended** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                       |   | **March 31,**          |   |
|                                                                                       |   | **2002**               |   | **2001** |   |
| Revenues, net                                                                              |   | $                      | 8,239  |   | $ | 13,158 |   |
| Amortization of technology rights & other                                              |   | 392                    |   | — |   |
| Cost of goods sold                                                                         |   | 5,612                  |   | 7,944 |   |
| Gross profit                                                                               |   | 2,235                  |   | 5,214 |   |
|                                                                                       |   |                   |   |   |   |
| Operating expenses:                                                                        |   |                   |   |   |   |
| Research and development                                                                   |   | 1,021                  |   | 351 |   |
| Selling, general and administrative                                                        |   | 2,510                  |   | 2,726 |   |
| In-process research & development                                                      |   | 1,897                  |   | — |   |
| Total operating expenses                                                                   |   | 5,428                  |   | 3,077 |   |
| Income (loss) from operations                                                              |   | (3,193                 | )      | 2,137 |   |
| Interest income, net                                                                       |   | 219                    |   | 523 |   |
| Other income, net                                                                          |   | 39                     |   | 81 |   |
| Income (loss) before income tax expense                                                    |   | (2,935                 | )      | 2,741 |   |
| Income tax expense (benefit)                                                               |   | (370                   | )      | 959 |   |
| Net income (loss)                                                                          |   | $                      | (2,565 | ) | $ | 1,782 |   |
|                                                                                       |   |                   |   |   |   |
| Net income (loss) per share:                                                               |   |                   |   |   |   |
| Basic                                                                                      |   | $                      | (0.26  | ) | $ | 0.21 |   |
| Diluted                                                                                    |   | (0.26                  | )      | 0.19 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                   |   |   |   |
| Basic                                                                                      |   | 9,859                  |   | 8,452 |   |
| Diluted                                                                                    |   | 9,859                  |   | 9,300 |   |

 

See accompanying notes to consolidated financialstatements.

 

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **
|                                                                               |          | **Three Months Ended** |   |
|------------------------------------------------------------------------------------|---------------|------------------------|--------|
|                                                                               |          | **March 31,**          |   |
|                                                                               |          | **2002**               |   | **2001** |   |
| Cash flows from operating activities:                                              |          |                   |   |   |   |
| Net income (loss)                                                                  |          | $                      | (2,565 | ) | $ | 1,782 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |          |                   |   |   |   |
| Depreciation and amortization                                                      |          | 625                    |   | 258 |   |
| Amortization of deferred stock compensation                                        |          | 146                    |   | 41 |   |
| Amortization of investment discount                                                |          | 36                     |   | — |   |
| Deferred gain on sale-leaseback                                                    |          | (5                     | )      | (4 | ) |
| Non-cash charge for in-process research &  development                         |          | 1,897                  |   | — |   |
| Changes in operating assets and liabilities, net of  effects of acquisition:       |          |                   |   |   |   |
| Accounts receivable                                                                |          | (765                   | )      | (1,424 | ) |
| Inventories                                                                        |          | 849                    |   | (756 | ) |
| Prepaid expenses and other assets                                                  |          | 1,781                  |   | (251 | ) |
| Accounts payable and accrued expenses                                              |          | (301                   | )      | 172 |   |
| Net cash (used in) provided by operating activities                                |          | 1,698                  |   | (182 | ) |
|                                                                               |          |                   |   |   |   |
| Cash flows from investing activities:                                              |          |                   |   |   |   |
| Purchases of available-for-sale securities                                         |          | (1,000                 | )      | (2,002 | ) |
| Proceeds from sale of available-for-sale securities                                |          | 3,736                  |   | 1,000 |   |
| Payment for acquisition, net of cash acquired                                      |          | (14,085                | )      | — |   |
| Proceeds from sale of property and equipment                                       |          | 72                     |   | — |   |
| Purchase of property and equipment                                                 |          | (259                   | )      | (677 | ) |
| Net cash used in investing activities                                              |          | (11,536                | )      | (1,679 | ) |
|                                                                               |          |                   |   |   |   |
| Cash flows from financing activities:                                              |          |                   |   |   |   |
| Payments on capital lease obligations                                              |          | (18                    | )      | (26 | ) |
| Principal payments on long-term debt                                               |          | —                 |   | (20 | ) |
| Proceeds from exercise of stock options                                            |          | 94                     |   | 276 |   |
| Net cash provided by financing activities                                          |          | 76                     |   | 230 |   |
|                                                                               |          |                   |   |   |   |
| Effects of exchange rate changes on cash                                           |          | 5                      |   | 26 |   |
| Net change in cash and cash equivalents                                            |          | (9,757                 | )      | (1,605 | ) |
| Cash and cash equivalents at beginning of period                                   |          | 16,102                 |   | 25,326 |   |
| Cash and cash equivalents at end of period                                         |          | $                      | 6,345  |   | $ | 23,721 |   |
|                                                                               |          |                   |   |   |   |
| Supplemental disclosure of cash flow information:                                  |          |                   |   |   |   |
| Cash received (paid) during the period for:                                   | Interest      |                   | $      | (29 | ) | $ | (18 | ) |
|                                                                               | Income  taxes |                   | 1,395  |   | — |   |
|                                                                               |          |                   |   |   |   |
| Supplemental disclosure of noncash activities:                                     |          |                   |   |   |   |
| Unrealized gain (loss) on short-term and long-term  investments                    |          | $                      | (35    | ) | $ | 53 |   |
| Issuance of stock and options for acquisition of  business                         |          | 20,313                 |   | — |   |
|                                                                               |          |                   |   |   |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Dollars in thousands)**

 

**Note1. BASIS OF PRESENTATION**

 

The accompanying unaudited consolidated financialstatements include normal recurring adjustments necessary for a fairpresentation of Advanced Power Technology, Inc.’s (APT) interim results.  The consolidated financial statements andnotes in this Form 10-Q are presented as permitted by Regulation S-X, and assuch, they do not contain certain information included in APT’s 2001 annualconsolidated financial statements and notes. This Form 10-Q should be read in conjunction with APT’s consolidatedfinancial statements and notes included in its Annual Report on Form 10-K forthe year ended December 31, 2001.  Thefinancial information as of December 31, 2001 is derived from the auditedconsolidated financial statements as filed with APT’s Annual Report on Form10-K for the year ended December 31, 2001. The results of operations for the three months ended March 31, 2002 arenot necessarily indicative of the results expected for the entire fiscal yearending December 31, 2002.

 

APT’s financial quarters are 13 week periods. Thefirst quarter of 2002 ended on March 31 and the first quarter of 2001 ended onApril 1.  For convenience, the firstquarters of 2002 and 2001 are shown as ended on March 31.

 

**Note 2.COMPREHENSIVE INCOME**

                  Comprehensiveincome is the total of net income and all other non-owner changes in equity.Comprehensive income includes foreign currency translations and unrealizedgains and losses from investments, as presented in the following table(unaudited).

 

|                                                    |   | **Three Months Ended** |   |
|---------------------------------------------------------|--------|------------------------|--------|
|                                                    |   | **March 31,**          |   |
|                                                    |   | **2002**               |   | **2001** |   |
| Net income (loss)                                       |   | $(2,565                | )      | $1,782 |   |
| Other comprehensive income (loss), net of tax           |   |                   |   |   |   |
| Foreign currency translation adjustment                 |   | (9                     | )      | (33 | ) |
| Unrealized gain (loss) on available for sale securities |   | (35                    | )      | 53 |   |
| Comprehensive income (loss)                             |   | $(2,609                | )      | $1,802 |   |

 

**Note 3. INVENTORIES,NET**

                

|               |   | **March 31,   2002** |   | **December  31,   2001** |   |
|--------------------|--------|----------------------|--------|--------------------------|--------|
|               |   | **(unaudited)**      |   |                     |   |
| Raw materials      |   | $                    | 2,133  |                     | $      | 1,254 |   |
| Work in process    |   | 5,766                |   | 5,587                    |   |
| Finished goods     |   | 3,752                |   | 3,407                    |   |
|               |   | 11,651               |   | 10,248                   |   |
| Valuation  reserve |   | (1,263               | )      | (941                     | )      |
|               |   | $                    | 10,388 |                     | $      | 9,307 |   |

 

 

6

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**Note4. NET INCOME PER SHARE**

 

Basic net income per share is computed using theweighted average number of shares of common stock outstanding for the period.Diluted net income per share is computed using the weighted average number ofshares of common stock and dilutive potential common shares related to stockoptions and warrants outstanding during the period. Incremental shares relatedto outstanding stock options and warrants of approximately 848,000 for thethree months ended March 31, 2001, were included in the calculations of dilutednet income per share for that period. Incremental shares related to outstanding stock options of 902,000 and42,000 for the three months ended March 31, 2002 and 2001, respectively wereexcluded from the calculation of diluted net income per share because theeffect would have been anti-dilutive.

 

**Note 5.ACQUISITION OF GHZ TECHNOLOGY, INC.**

 

                On January 25, 2002, APT acquired all of theoutstanding shares of GHz Technology, Inc. (GHz), in exchange for cash, APTcommon stock, and APT stock options in exchange for all outstanding GHz stockoptions.  The GHz assets acquired included approximately $205,000 in cash and $7.7million in marketable securities.  Thetransaction was accounted for by the purchase method of accounting, inaccordance with FAS 141, “Business Combinations” and FAS 142, “Goodwill andOther Intangible Assets.” APT began to consolidate the financial results of GHzTechnology on January 25, 2002 and forward.  The purchase price for accounting purposeswas derived as follows:

 

|                  |   | **Shares** |   | **Fair Value** |   |
|-----------------------|--------|------------|--------|----------------|--------|
| Cash                  |   |       |   | $              | 13,453 |   |
| Stock                 |   | 1,522,976  |   | 16,220         |   |
| Exchanged  options    |   | 425,823    |   | 4,093          |   |
| Direct  costs         |   |       |   | 837            |   |
| Total  purchase price |   |       |   | $              | 34,603 |   |

 

                APTcommon stock was valued at the average stock price at the time of thedeal.  With respect to stock optionsexchanged as part of the merger consideration, all vested and unvested GHzoptions exchanged for APT options are included as part of the purchase pricebased on their fair value.  Theestimated fair value of the options to be assumed by APT is based upon theBlack-Scholes model using the following assumptions:

•                  Expected life of 5 years

•                  Expected volatility of 100%

•                  Risk-free interest rate of 4.3%; and

•                  Expected divided rate of 0%

 

                GHz’s productscomplement APT’s current portfolio of Radio Frequency (RF) products thatoperate at frequencies ranging from 1 MHz to 100 MHz and are sold intoapplications such as semiconductor capital equipment, medical imaging, andindustrial systems. The GHz products are capable of frequencies ranging from 10MHz to 3.5 GHz and are primarily sold into applications such as avionics andradar as well as wireless communications and semiconductor capital equipment

 

Theallocation of purchase price was as follows:

 

| Net tangible assets of GHz                               |   | $      | 11,591 |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Inventory fair value adjustment                          |   | 450    |   |
| Deferred compensation on unvested stock options  assumed |   | 523    |   |
| Acquired in-process research & development           |   | 1,897  |   |
| Acquired intangible technology rights                    |   | 7,449  |   |
| Goodwill                                                 |   | 15,061 |   |
| Deferred tax liability                                   |   | (2,368 | )      |
| Allocated purchase price                                 |   | $      | 34,603 |   |

 

 

7

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In connection with thisacquisition, the Company recorded a one time charge of $1.9 million for thewrite-off of in-process research and development (IPR&D).  The value assigned to IPR&D related toresearch projects for which technological feasibility had not yet beenestablished and for which there was no other feasible alternative use for thetechnology.  In addition, the Companyrecorded an intangible asset for acquired current technology rights in theamount of $7.4 million, to be amortized over ten years, the expected life ofthe technologies.  Total goodwillrecorded was $15.1 million.  TheIPR&D, technology rights and goodwill amounts are not deductible for taxpurposes.

 

The values of IPR&D andtechnology rights were determined by estimating the net cash flows from thesale of products from these technologies over a ten year period and discountingthe net cash flows back to their present value using risk adjusted interestrates of 15-20% for current technologies and 25-40% for in-processtechnologies.  The estimated net cashflows from these products were based on management’s estimates of relatedrevenues, costs of goods sold, operating expenses, income taxes, and additionalcosts to completion for in-process technologies.

 

                The nature of theefforts to develop the in-process technology into commercially viable productsprincipally related to the completion of all designing, prototyping,verification and testing activities that are necessary to establish that theproduct can be produced to meet its design specifications, including function,features, and technical performance requirements.  GHz had three main product groups under development at theacquisition date that met the minimum development requirements for IPR&Dprojects.  Each contributed from 11% to62% of the total IPR&D value.  Theprojects included L Band and S Band radar as well as commercial LDMOSapplications.  The projects ranged from65% to 75% complete.  All projects hadexpected completion dates within 12 to 18 months and an estimated aggregatecost to complete of $1.2 million.

 

                The following tablereflects the unaudited combined results of APT and GHz as if the merger hadtaken place at the beginning of the three months ended March 31, 2002 and 2001,respectively.  The pro forma informationincludes adjustments for non-cash charges for amortization of technologyrights, inventory fair value adjustments, and deferred compensation.  Both periods exclude a charge of $1.9million for in-process research and development expense.  Both periods include the results of GHzbeginning on January 1, 2002 and 2001, respectively.  The pro forma information does not necessarily reflect the actualresults that would have occurred nor is it necessarily indicative of futureresults of operations for the combined companies.

 

 
|                                                                                       |   | **Three Months Ended** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                       |   | **March 31,**          |   |
|                                                                                       |   | **2002**               |   | **2001** |   |
| Revenues, net                                                                              |   | $                      | 8,649  |   | $ | 15,793 |   |
| Net income (loss)                                                                          |   | (1,147                 | )      | 1,066 |   |
|                                                                                       |   |                   |   |   |   |
| Net income (loss) per share:                                                               |   |                   |   |   |   |
| Basic                                                                                      |   | $                      | (0.11  | ) | $ | 0.11 |   |
| Diluted                                                                                    |   | (0.11                  | )      | 0.09 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                   |   |   |   |
| Basic                                                                                      |   | 10,277                 |   | 9,975 |   |
| Diluted                                                                                    |   | 10,277                 |   | 11,466 |   |

 

 

8

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

This discussion and analysisis intended to be read in conjunction with Management’s Discussion and Analysisof Financial Condition and Results of Operations set forth in our Annual Reporton Form 10-K for the year ended December 31, 2001.

**Forward-lookingStatements and Risk Factors Affecting Business and Results of Operations**

All statements and trendanalyses contained in this item and elsewhere in this report on Form 10-Qrelative to the future constitute “forward-looking” statements within themeaning of the Private Securities Litigation Reform Act of 1995.Forward-statements are subject to the business and economic risks faced by usand our actual results of operations may differ materially from those containedin the forward-looking statements. In addition, results of operations for theperiods discussed below should not be considered indicative of the results tobe expected in any future period and fluctuations in operating results mightresult in fluctuations in the market price of our common stock. Our quarterlyand annual operating results may vary significantly depending on many factors,including but not limited to, the ability of subcontractors to meet theirdelivery commitments; unfavorable changes in industry and competitiveconditions; our mix of product shipments; the accuracy of our customer’sforecasts; the effectiveness of our efforts to control and reduce costs; andother risks detailed in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Risk Factors Affecting Business andResults of Operations” in our Annual Report on Form 10-K for the year endedDecember 31, 2001, filed with the Securities and Exchange Commission.

**Overview**

We are a leading designer,manufacturer and marketer of high-performance power semiconductors and modules.Power semiconductors manage and regulate electrical power by convertingelectricity into a form required by electrical and electronic products. Ourpower semiconductors increase system efficiency, permit the design of morecompact end products and improve features and functionality. We are primarilyfocused on the high power, high frequency segment of the power semiconductormarket. High power refers to the ability to dissipate above one kilowatt, andhigh frequency refers to the ability to switch on and off at rates above 100kilohertz. In addition we are strengthening our portfolio of Radio Frequency(RF) products that operate at frequencies ranging from 1 megahertz to 100 megahertz.RF generally refers to the ability to operate at frequencies above 1 megahertz.We sell our products primarily in North America, Europe, and Asia, through anetwork of independent sales representatives and distributors.

To further our penetration inRF markets, in January 2002, we completed the acquisition of GHzTechnology, Inc., which has a portfolio of products capable of frequenciesranging from 10 megahertz to 3.5 gigahertz and are primarily sold intoapplications such as avionics, radar, wireless communications and semiconductorcapital equipment. The acquisition was recorded as a purchase transaction andwe recorded a one-time charge for purchased in-process research and developmentexpenses in the first quarter of 2002. We will also incur ongoing acquisitionrelated expenses for amortization of intangible assets and deferredcompensation related to stock options.

 

**Critical Accounting Policies andEstimates**

 

                AdvancedPower Technology’s discussion and analysis of its financial condition and resultsof operations are based upon consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires APT tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, APT evaluates its estimates, includingthose related to product returns and warranty obligations, bad debts,inventories, investments, income taxes, excess component order cancellationcosts, and contingencies and litigation. APT bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for 

 

9

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making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

                APT believes the followingcritical accounting policies affect its more significant judgments andestimates used in the preparation of its consolidated financial statements.

 

                                                •              APTmaintains allowances for doubtful accounts for estimated losses resulting fromthe inability of its customers to make required payments. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

 

                                                •              APTprovides for the estimated cost of product warranties at the time revenue isrecognized. While the Company engages in extensive product quality programs andprocesses, including actively monitoring and evaluating the quality of itscomponent suppliers, APT’s warranty obligation is affected by productnon-conformance rates, material usage and service delivery costs incurred incorrecting a product non-conformance. Should actual product non-conformancerates, material usage or service delivery costs differ from APT’s estimates,revisions to the estimated warranty liability would be required.

 

                                                •              APTwrites down its inventory for estimated obsolescence or unmarketable inventoryequal to the difference between the cost of inventory and the estimated netrealizable value based upon assumptions about future demand and marketconditions. If actual market conditions are less favorable than those projectedby management, additional inventory write–downs may be required.

 

                                                •              APTrecords an investment impairment charge when it believes an investment hasexperienced a decline in value that is other than temporary. Future adversechanges in market conditions or poor operating results of underlyinginvestments could result in losses or an inability to recover the carryingvalue of the investments that may not be reflected in an investment’s currentcarrying value, thereby possibly requiring an impairment charge in the future.

 

                                                •              APTrecords a valuation allowance to reduce its deferred tax assets to the amountthat is more likely than not to be realized. While APT has considered futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance, in the event APT were todetermine that it would be able to realize its deferred tax assets in thefuture in excess of its net recorded amount, an adjustment to the deferred taxasset would increase income in the period such determination was made.Likewise, should APT determine that it would not be able to realize all or partof its net deferred tax asset in the future, an adjustment to the deferred taxasset would be charged to income in the period such determination was made.

 

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**Results ofOperations**

 

                Thefollowing table presents our consolidated statement of operations data for theperiods indicated as a percentage of net revenue:

 
|                                     |   | **Three Months Ended** |   |
|------------------------------------------|--------|------------------------|--------|
|                                     |   | **March 31,**          |   |
|                                     |   | **2002**               |   | **2001** |   |
| Revenues, net                            |   | 100.0                  | %      | 100.0 | % |
| Amortization of technology rights, other |   | 4.8                    |   | — |   |
| Cost of goods sold                       |   | 68.1                   |   | 60.4 |   |
| Gross profit                             |   | 27.1                   |   | 39.6 |   |
| Operating expenses:                      |   |                   |   |   |   |
| Research and development                 |   | 12.4                   |   | 2.7 |   |
| Selling, general and administrative      |   | 30.5                   |   | 20.7 |   |
| In-process research & development    |   | 23.0                   |   | — |   |
| Total operating expenses                 |   | 65.9                   |   | 23.4 |   |
| Income (loss) from operations            |   | (38.8                  | )      | 16.2 |   |
| Interest & other income, net         |   | 3.1                    |   | 4.6 |   |
| Income (loss) before income tax expense  |   | (35.7                  | )      | 20.8 |   |
| Income tax (benefit) expense             |   | (4.5                   | )      | 7.3 |   |
| Net income (loss)                        |   | (31.2                  | )%     | 13.5 | % |

 

*                Revenues.*  Revenues for the first quarter of 2002 were $8.2million, including $2.0 million from GHz Technology Inc. (“GHz”), whichAdvanced Power Technology acquired effective January 25, 2002.  This represents a decrease of 37.4 percentcompared to $13.2 million in the first quarter of 2001 and an increase of 54.5percent sequentially from the $5.3 million recorded in the fourth quarter of2001.  Exclusive of GHz , revenuesequentially increased from the fourth quarter by 16.2%.  The overall quarterly sequential increase inrevenue was due to stronger shipments in the communications and semiconductorcapital equipment markets and the contribution of GHz.  Revenues, exclusive of GHz, in the firstquarter of 2002 in all market segments are still significantly lower than inthe first quarter of 2001, primarily on lower unit volumes.  Revenue in the military and aerospacemarkets increased form the prior year quarter on revenues from GHz.

 

                *Gross Profit.*  Gross margin for the first quarter of 2002 was 27.1percent compared to 39.6 percent for the first quarter of 2001 and 19.8 percentfor the fourth quarter of 2001.  Thedecrease in gross margin over the prior year quarter was primarily due tosignificantly lower fixed cost absorption in the Company’s internalmanufacturing facilities.  However,gross margin improved from the fourth quarter of 2001, primarily due to costreductions realized from the downsizing of the Company’s internal waferfabrication facility, the contribution of GHz higher margin RF products, andthe favorable conclusion of negotiations associated with a contractcancellation dating back to December 2000. Gross margin in the first quarter of 2002 also included $392,000, or4.8%, of acquisition related charges for the amortization of purchasedtechnology rights, an inventory fair value adjustment and deferred compensationamortization.

 

*                Research and DevelopmentExpense.*  First quarter of 2002 research and developmentexpenses totaled $1.0 million or 12.4 percent of revenues, compared to$351,000, or 2.7 percent of revenue in the first quarter of 2001, and $635,000in the fourth quarter of 2001.  In spiteof the difficult market environment the Company has been accelerating itsresearch and development programs leading to the introduction of new products,especially in its Power MOS 7TM products. Theincreased spending over the prior year quarter is mainly due to additionalsupplies and materials to support the development and introduction of new products.  The increase in research and developmentexpenses over the fourth quarter of 2001 is primarily due to the addition ofGHz, which was $385,000 consisting mainly of payroll, supplies, anddepreciation charges.

 

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*                Selling, General andAdministrative Expense.*  Selling, general and administrativeexpenses totaled $2.5 million in the first quarter of 2002, or 30.5 percent ofrevenues, a 7.9 percent decrease compared to $2.7 million in the first quarterof 2001, and a 31.8% increase over the $1.9 million in the fourth quarter of2001.  The increase in SG&A expensesover the fourth quarter of 2001 is primarily due to the addition of GHz, whichwas $512,000 consisting mainly of payroll and commissions.  Without the addition of the GHz SG&Aexpenses, first quarter spending was $2.0 million compared to the $2.7 millionspent in the first quarter of 2001.  Thedecline is primarly due to lower spending on salaries and commissions.  The Company has continued a wage freeze andgraduated pay reduction program for most domestic salaried and hourly workers and lower overall discretionary spending.

 

*                Stock Compensation Expense.*  Stock compensation expense includes costsrelating to stock–based employee compensation arrangements, and is basedon the difference between the fair market value of our common stock on the dateof grant of options and the exercise price of options to purchase that stock.Stock compensation expense is recognized over the vesting periods of the relatedoptions, typically five years. On a consolidated basis, stock compensationexpense of $146,000 was recorded in the first quarter of 2002. Of this amount,$64,000 was recorded in cost of goods sold, $22,000 was recorded in researchand development expense and $60,000 was recorded in selling, general andadministrative expense. Stock compensation expense of $41,000 was recorded inthe first quarter of 2001. Of this amount, $13,500 was recorded in cost ofgoods sold, $5,000 was recorded in research and development expense and $22,500was recorded in selling, general and administrative expense. The increase indeferred compensation expense over the prior year quarter is due to theexchanged stock options issued pursuant to the acquisition of GHz.  We expect to record stock compensationexpense of $131,000 in the second quarter of 2002.

 

                *Interestand**other income, net*. Interest and other income, net, whichincludes interest income, interest expense and other income and expense, was$258,000 in the first quarter of 2002 compared to $604,000 in the first quarterof 2001.  The primary component isinterest income on our cash and marketable securities.  Net interest income was $219,000 in thefirst quarter of 2002 compared to $523,000 in the first quarter of 2001.  The decline in interest income is primarilydue to much lower interest rates available in the current investment market anda lower investment balance due to cash used in the acquisition of GHz (seeLiquidity and Capital Resources below).

 

                *Income Tax Expense (Benefit)*. We recorded a tax benefit in the first quarter of2002, at an effective tax rate of approximately 12.6%. We expect our annualeffective tax rate will approximate 13.2% for 2002.  The effective tax rate in the first quarter of 2002 was lowerthan the federal statutory rate primarily due to the book expense of in processresearch and development expenses that are not deductible for tax purposes andthe benefit of a reduction in the valuation allowance due to the realization offoreign net operating loss carry forwards. The effective tax rate in the first quarter of 2001 was approximately34.9%.

 

**Liquidity andCapital Resources**

In the quarter of 2002, wegenerated approximately $1.7 million from operating activities.  This was primarily from our net loss of $2.6million offset by non-cash charges for depreciation and amortization of$625,000, IPR&D of $1.9 million and a decrease in other assets of $1.8million.  The decrease in other assetswas mainly due tax refunds received for $1.4 million.

                In the first quarter of 2002, weused approximately $11.5 million in investing activities, which consistedmainly of our acquisition of GHz, partially offset by net proceeds from thesale and purchase of marketable securities of $2.7 million.  The acquisition of GHz consumed $14.1million of cash and direct costs, net of cash acquired of $205,000.  In addition we issued APT stock and optionsvalued at $20.3 million.  The GHz assetsacquired included approximately $205,000 in cash and $7.7 million in marketablesecurities.

 

                Inthe first quarter of 2002, we generated approximately $76,000 from financingactivities, which primarily consisted of net proceeds of $94,000 from theexercise of stock options.

 

                APTcurrently expects to fund expenditures for capital requirements as well asliquidity needs from a combination of available cash balances, internallygenerated funds and financing arrangements if needed. As of March 31,2002, APT had $30.7 million in cash and cash equivalents and available-for-salesecurities. APT’s investment policy is to invest in short term, high-gradeliquid investments with the goal of capital preservation. APT’s ability togenerate positive cash flow from operations may be affected by marketconditions as well as other risk factors as 

 

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described in our Annual Report onForm 10-K for the year ended December 31, 2001. We expect from time to time toevaluate potential acquisitions and equity investments complementary to ourmarket strategy. To the extent we pursue such transactions, we could requireadditional equity or debt financing to fund such activities or to fund ourworking capital requirements in the event of an industry downturn or anunexpected adverse change in our business operations. To the extent we requireadditional capital, we cannot assure you that we will be able to obtain suchfinancing on terms favorable to us, or at all.

 

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

                We do not use derivative financial instruments in ourinvestment portfolio. Due to the short duration and conservative nature of ourcash equivalents, and the high quality and conservative nature of ourinvestments, we do not expect any material loss with respect to our investmentportfolio.

 

                Currently less than 3% of oursales are transacted in local currencies, primarily Euro dollars. As a result,our international results of operations are subject to foreign exchange ratefluctuations. We do not currently hedge against foreign currency ratefluctuations. Most of our export sales and sales by APT Europe are inU.S. dollars, and most of our foreign currency sales are from operationswith significant expenses in the same currency. As a result, gains and lossesfrom such fluctuations have not been material to our consolidated results ofoperations.

 

 

**PART II.  OTHERINFORMATION**

 

**ITEM6. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) The exhibitsfiled as part of this report are listed below:

 
| **Exhibit No.** |   |
|-----------------|--------|
|            |   |
| None            |   |

 

 

(b) Reports onForm 8-K

 

           During the three month period endedMarch 31, 2002, a report on Form 8-K was filed on February 8, 2002.  An amendment to this Form 8-K was filedApril 9, 2002.

 

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**SIGNATURE**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized this 15th day of May, 2002.

 

 

 
|   |   | ADVANCED POWER TECHNOLOGY, INC.             |
|--------|--------|---------------------------------------------|
|   |   |                                        |   |
|   |   | By:                                         | /s/ GREG M. HAUGEN |
|   |   |                                        |   |
|   |   | Greg M. Haugen                              |
|   |   | Vice President, Finance and Administration, |
|   |   | Chief Financial  Officer and Secretary      |
|   |   | (Principal Financial Officer)               |

 

 

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